Why closing your oldest credit card may be a bad idea
Dear Credit Score Report,
I'm reading your articles and several of them stress length of credit history as an important factor. Let me tell you about myself: I have had credit cards for 20 years, pay them off in full, have never been late and have a credit score in the 780 range. But my two oldest cards have both gotten worse in the past year or so. Both have higher rates and one imposed an annual fee. I get offers for better cards all the time. But if I close the old cards and have two new cards instead, will my credit rating go down? What's the logic of that? I'm no riskier than I was before. -- Jaconda
Even if the logic may not seem obvious at first, closing those cards will likely make your FICO score fall. That's because closing your oldest accounts will shorten your borrowing history, making it appear you have less experience using credit cards than you actually do.
As you probably know, the FICO credit scoring model looks favorably on consumers who have long histories of responsible credit card use. With 20 years as a borrower and a credit score in the high 700s, you are obviously among them. Although it's unfortunate your banks are risking the loss of a good customer by raising your interest rates and imposing an annual fee, your high credit score means you have the option of applying -- and likely getting approved -- for a new card. According to our 2011 credit card fee survey, 95 percent of credit cards don't charge an annual fee -- so you have options.
But the news isn't all good: If you choose to close your oldest accounts, that will eventually shorten the credit history listed on your credit reports, which may cause a drop in your FICO score. Closing accounts when you have outstanding balances can also boost utilization ratios -- which measure debt relative to credit limits -- and hurt your credit score. (However, if you replace the closed cards with two new cards, keeping your total available credit about the same, that shouldn't be much of an issue for you.) Both of those changes will make you look riskier to lenders.
Closed accounts will remain on your credit reports for only so long. While those accounts won't vanish immediately, they will eventually be taken off your credit reports. Accounts with positive credit history, such as yours, remain on reports for 10 years; accounts with negative history, meanwhile, remain for seven years from the date of first delinquency. Once your oldest accounts disappear, the FICO scoring model won't be able to consider them, since the score is generated at a specific moment in time. Whatever appears on your reports at that moment can go into your FICO score, while anything that doesn't appear can't be considered.
Here's an example that I hope will help: Right now you have two cards that are 20 years old. Let's say that in addition to those cards, you have another account that has only been open for five years. That means after you close those old accounts and they drop off your credit history, your credit report will only include the newer account, effectively trimming your credit history by 15 years (the difference between the oldest and newest accounts). Based on your abbreviated credit history, your FICO score may fall.
Maybe you can avoid closing those accounts. If you never carry a balance past the bank's due date, then it shouldn't matter how high your credit card's interest rate goes. If you're unhappy with that new interest rate, however, call the bank and let them know that you are a responsible, long-standing customer who would like to have your interest rate reversed back to what yours once had. Don't threaten to close an account unless you're willing to do so, but with your good credit, you can easily transfer a credit card balance.
Similarly, I'd encourage you to call the card issuer that imposed an annual fee and see about having it removed from your account. If they won't budge, you can always close that account and leave the other old card open. If those cards are the same age, closing one will still leave you with 20 years of credit history. If the card you close is older, at least you'll still hang onto most of your credit history by maintaining the second-oldest account in your wallet.
You've spent 20 years building a good credit history, and it would be a shame to lose it now.
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